Labour and Capital Gains Tax (CGT) - What might we see from the new Government?

This silence has been a focus from the media, with Labour sticking to a line that there are “no plans” to increase capital gains tax, however stopping short of ruling it out. Recently the Chancellor commented that, "I think we will have to increase taxes in the Budget" and did not rule out capital gains tax in the discussion.

Rachel Reeves stated earlier this year that Labour has ‘no plans’ to increase capital gains tax [1]. She also stated in 2023 on BBC Radio 4's Today programme that “I don't have any plans to increase capital gains tax. There are people who have built up their own businesses who maybe at retirement want to sell that business. They may not have had huge income through their life if they've reinvested in their business, but this is their retirement pot of money” [2]. 

It is quite possible that this will remain the policy of the new Government, but several Labour MPs have voiced their views that the rates of capital gains tax should be raised, with some backing a raise to bring it in line with the rates of income tax.

Capital gains tax is not a big revenue raiser, with the Office for Budget Responsibility (OBR) estimating that total capital gains tax receipts will be £15.2 billion in 2024/25, which represents 1.3% of all receipts. However, if Labour introduces measures to increase tax revenue, a rate rise would be an option as part of a package. One possibility is that Labour could look to increase rates of capital gains tax at the next Budget, set for 30 October. But when would an increased rate apply from?

It is impossible to completely rule out a mid-year rate change, but it is unlikely. The then Chancellor, George Osborne, caught many off guard by announcing an increase in the rate of capital gains tax from 18% to 28% from midnight on 22 June 2010. So there is precedent for this, but it is more usual for a rate change to come into effect at the start of a new tax year. 

The time between announcement and implementation is then used by many to make disposals to lock in the current rates, and this jump in disposals is a boost to the public finances, as despite being treated more beneficially for the taxpayer it accelerates tax collection. 

It would also come as no surprise if Labour were to remove or reform the capital gains tax uplift given on assets on the death of an individual. The Office of Tax Simplification recommended in 2020 that where an IHT relief or exemption applies, such as the spouse exemption or business or agricultural relief, the recipient should receive the assets at the historic base cost. It went on to suggest this could go further and apply to most assets.

The more recent Demos report also recommended removing the capital gains tax uplift, as have reports from the IFS and an All-Party Parliamentary Group. This could be done either by ensuring assets are inherited at their original base cost, or by charging capital gains tax on death as though assets had been disposed of.

Those with assets standing at a gain may now be considering what if any action they should take in the run up to a Budget. This is a difficult question to answer, as clearly it is impossible to forecast which tax policies will be in place in the next few months, so any actions taken now involve risk. It is certainly a good time to be having a conversation with your tax adviser.

Some actions that you could consider include:

1. Accelerating any planned disposals, so that you have certainty over the tax position
2. If your planning depends heavily on a particular relief, understanding what impact changes to it would have and considering any actions you could take now. 
3. Rebasing investment portfolios is an option some are considering, but be aware that bed and breakfasting rules apply and investment advice should be sought as this comes with investment risk
4. Investments held in pensions and ISA wrappers are currently exempt from capital gains tax, so available pension and ISA allowances should be used where suitable
5. Early estate planning to understand the tax implications of passing assets in lifetime and on death.

This list is not meant to be exhaustive and will vary depending on each taxpayer’s particular circumstances. If you would like to discuss any of the above do get in touch with your usual contact or one of the contacts listed.

[1] - https://labourlist.org/2024/06/labour-party-rachel-reeves-capital-gains-tax/ 
[2] - https://www.bbc.co.uk/news/uk-politics-65122284 

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